Analysis | Thought Hiking Rates Was Tough? Wait for the Pause

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If breaking up is hard to do, explaining why you want to take a breather comes a close second. Unless confident it’s time for something new, the temptation to equivocate is considerable. In monetary affairs, figuring out what an interest-rate pause looks like — and the degree of conviction behind it — can be a perilous exercise. Calculating when to take five carries no shortage of risks.   

Central banks are unlikely to be categoric when they suspend rate hikes in coming months. It may only become clear in retrospect that the hold button has been pressed. For good reason: Inflation is receding, though significantly above target. Global growth is slowing, though by less than feared a short while ago. One juicy piece of data, like a strong jobs number or prices looking a little too sticky, can sway sentiment on the future path of borrowing costs. Will it be one or two more nudges higher, perhaps even three?

The pitfalls of trying to pinpoint the advent of a pause were on display last week when the Reserve Bank of Australia lifted its main rate by a quarter point, as forecast by a majority of economists. The sting was in the accompanying statement. The words were just hawkish enough to throw predictions of a coming pause off by a month or two — and push the Aussie dollar higher and bonds lower. Governor Philip Lowe dropped last year’s qualifier that the bank wasn’t on a preset path and said further hikes will be needed.

It’s not so much that Lowe indicated there’s still work to be done that unsettled investors. It’s far too early to call the all clear on inflation, especially given the bank is still under fire for suggesting late last year that rates may not need to rise until 2024. What stood out in the RBA commentary is the absence of any clear indication that a pause was on the table. Records of RBA deliberations in late 2022 showed a suspension was among options the board mulled. “Our job is to call what we think the RBA will do and not what we think they should do,” wrote Gareth Aird at Commonwealth Bank of Australia, which now sees the key rate being pushed up to 3.85%, from 3.35%. He said policy is headed “into deeply restrictive territory.” The risks of an error are multiplying.  

By the way, a sabbatical is no guarantee of a rest. Bank of Canada Governor Tiff Macklem declared a conditional pause last month and is now defending the middle ground against both hawks and doves. Macklem thinks that it can take 18 to 24 months to see the full effects of higher borrowing costs. “We need to pause rate hikes before we slow the economy and inflation too much,” he told a business audience. “We shouldn’t keep raising rates until inflation is back to 2%.” It’s been a while since a central banker fretted publicly about the risk inflation recedes too much. 

Folks at the Bank of Korea might do well to review Macklem’s address. Early to raise rates in 2021, the BOK was widely thought poised to skip a hike this month. Then figures last week showed prices jumped in January, keeping alive the prospect of further tightening. The pause may still happen, with cuts by year’s end, but there’s a slight element of doubt. Governor Rhee Chang-yong did warn in January that markets shouldn’t rush to pronounce the hiking cycle complete.Malaysia passed on an expected increase last month while Indonesia delivered a dovish hike — a quarter-point climb accompanied by the suggestion officials have done enough. If inconvenient data start pouring in, both will be under pressure to revisit. The obvious criticism: Why did you take the risk of doing too little, as opposed to too much? 

Risk management just isn’t what it used to be. In his first speech as Federal Reserve chair to the institution’s annual Jackson Hole retreat in 2018, Jerome Powell spent a lot of time extolling Alan Greenspan’s approach. In particular, he liked the maestro’s habit in the 1990s of delaying bit by bit until the choices became clearer. Then, it was about whether — and when — getting off a pause was more prudent than staying in place. Powell characterized the modus operandi of that era like this: “The committee converged on a risk-management strategy that can be distilled into a simple request: ‘Let’s wait one more meeting; if there are clearer signs of inflation, we will commence tightening.’” The situation could now be framed as the opposite: Wait on the pause until you are confident inflation is on the run and won’t seize up again — and embarrass you. 

The process has begun, though is yet to fully play out. Like rummaging around in a cardboard container long after the movers have unloaded your bulky furniture. The pause is in here somewhere. Just one more box.

More from Bloomberg Opinion:

• Let’s Be Big Enough to Accept This Economic Gift: Daniel Moss

• Fed Pivot Is Dead. Long Live the Fed Pirouette: Robert Burgess

• Can’t Give Up Your Low Mortgage Rate? Renovate!: Alexis Leondis

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics.

More stories like this are available on bloomberg.com/opinion

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